Where to invest in China now

Commentary: Consider clean-energy industry, Chinese blue chips

BOSTON (MarketWatch) — The world is all in a dither about there being 7-plus billion people now living on this Earth. But the only people who seem to matter at the moment, really, are the 1.3 billion living, working and consuming in China right now.

Yes, China holds the purse strings. It’s seemingly controlling the world’s agenda. And everyone is talking about the Chinese.

World Bank to Europe: Leave China alone

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Europe is counting on emerging nations and Asia to step in and help bail out the Eurozone, but that may not pan out as planned.

For instance, the Brookings Institution this week hosted a conference in which experts talked about China’s master plan to rebalance its economy, primarily by emphasizing domestic consumption over China’s current model of export-led growth.

Plus, China is grabbing headlines as leaders of the G-20 nations meet in France this week to discuss global economic recovery and the ongoing debt crisis. What sort of concessions will China get in return for investing in the European Union?

“In short, you can’t not pay attention to them,” said Philip Abbenhaus, the director of the Asian Equity Research Institute.

That leaves us asking: What sort of investment opportunities are emerging here in the U.S. and in China given current conditions?

Commodities

For its part, the team that manages BlackRock’s Global Allocation Fund
MDLOX, +0.16%
reports this week that there’s no shortage of opportunities, including many commodities, “particularly in those cases where the emerging markets are the marginal consumer.”

According to the BlackRock team, “those countries are not slowing in the same way as the developed world, and they are becoming a larger part of commodity consumption.”

For example, the BlackRock team said that oil prices may come down now because of declining consumption and inventory buildup in the United States.

“However, the rest of the world continues to grow. Today, India and China are consuming at levels that are far below other nations. As these developing economies continue to grow at faster rates, it is likely the demand for natural resources such as oil, coal and natural gas will continue to go higher,” the report said.

“So, the temporary weaknesses in some of these commodity markets are creating excellent buying opportunities for the longer-term, meaning two or three years out.”

Bullish on green energy and culture in China

Make no mistake about it, China and India are growing rapidly, so much so that policymakers in China and India face a completely different problem. “They’re confronted with economies that are overheating, with rising consumer prices and with wages that are growing at a double-digit rate,” the BlackRock analysts said.

Yes, there are those who say China’s economy is slowing. But the risk of a recession in China in the near future is very low, according to Abbenhaus of the Asian Equity Research Institute. For instance, China’s National Bureau of Statistics last week said the world’s second largest economy will likely maintain its stable and relatively fast growth.

Others agree. “Our sense is that China is slowing from very rapid growth to rapid growth, BlackRock said. “Now, we should be very clear that this is not by accident, but a result of Chinese government policies to slow the economy.

“The government is trying to both influence the over-building of housing in some cities and also deal with rising consumer prices and rising wage rates via more restrictive monetary policy. However, as the Chinese economy slows, there is great scope for those policies to change and, if need be, to become more stimulative.”

Given current conditions in China, there are currently two areas worth investigating, said Lei Chen, an associate professor of economics at Wuhan University in China, in an email. One is the cultural industry and the other is the clean-energy industry.

Last month, at the sixth plenary session of the 17th Central Committee of the Communist Party of China, Chen said a cultural-development guideline was adopted to deepen the reform of China’s cultural system and to promote the industry to become “a pillar of the national economy.”

In 2010, cultural industries — including the publishing, movie and advertising industries, among others — contributed 2.78% to China's GDP. With the new investment and development in these industries, the Chinese government expects this figure to rise to 5% in 2016.

According to Chen, the leading companies in the cultural industries include Beijing Gehua CATV Network Co., China Television Media Co., Guangdong China Sunshine Media Co., and Times Media Co.

As for the clean-energy industry, Chen said the Chinese government has realized the importance of environmental protection to sustainable economic development. In China's 12th five-year (2011-2015) development plan, it emphasizes the development and utilization of clean energy, including hydroelectric power, wind power, solar energy, biomass energy, and the like.

“The government will encourage and support the research and development in these fields as well as offering tax incentives to related businesses,” Chen said. “Because China's economy is still considered a partly market-oriented and partly central-control economy, policies and decisions from the central government have direct impacts to the related industries.”

Chen said the leading companies in the clean-energy industries include Advanced Technology & Materials Co., Lanzhou Great Wall Electrical Co., Shenyang Jinshan Thermoelectric Co., and Guangdong Electric Power Development Co.

Blue chips in China

Others are of a similar opinion. “With U.S. and European markets in turmoil, Chinese stocks may warrant a closer look, because the economy is still growing at an estimated 9% pace, transparency will be increasing, and Chinese government signals point the way to the safest buys,” Abbenhaus said.

“The central government basically tells you what they’re going to invest in, and I like to bet with the central government,” Abbenhaus said. “So you look at sectors that are favored, and it makes investing in China a little bit easier.”

One such sector, according to Abbenhaus, is agriculture, though there isn’t a way to take advantage of that on U.S. markets. Communications and energy and oil in particular are two other sectors that are in favor. “In essence, everything that touches the Chinese consumer, the Chinese citizen is the place that you want to be,” he said.

“They all pay a dividend, and as a group have increased an average 9.5% in 2011,” Abbenhaus said. “Will these stocks fluctuate with the markets? Sure. Can the U.S. economy impact China? You bet. But does this basket of stocks stick to providing critical services to the largest population on the planet? Absolutely.”

Where does an 800-pound gorilla sit?

And then there’s Rob Isbitts, the chief investment strategist at Carson Wealth Management, who this week shared the following scenario.

“What if China really gets angry?” Isbitts said, in a commentary that appeared on RIABiz, a trade website. “Where does an 800-pound gorilla sit? Anywhere he wants.

“Where does a country with 1.3 billion people and a lot of our bonds in its portfolio sit? On us, until we yell ‘Uncle!’” he said.

“It’s fashionable in D.C. and elsewhere to bash the Chinese for their suppressive human-rights policies and certain business practices. But this is what built up while consumers and governments in the developed world were fighting over Tickle Me Elmo’s, iPhones for our eight-year-olds and flipping houses for a living,” he said.

“Meanwhile, the Chinese and another billion-plus people in India are taking a run at Westernization… and economic supremacy. The good news is that we will service their needs through our corporations, which will play a major role in feeding and entertaining the population in areas formerly known as the ‘Third World,’” Isbitts said.

“The bad news is that in the long run, this could become our primary role in the global economy, because our economy will be locked into slow-growth mode for the foreseeable future.” Read Isbitt’s commentary at this website.

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